The long awaited further consultation document from HMRC has been released for individuals who are resident but not domiciled in the UK. This document provides further detail on the reforms but also importantly seeks responses on certain aspects of the proposed changes.
The main points to note are as follows:

UK Inheritance tax (IHT) on UK residential property

• IHT will now be payable from 6 April 2017 on all UK residential property owned by non-doms either directly or indirectly via offshore companies, offshore trusts and overseas partnerships.
• The mechanism for bringing such UK residential property held in this way into the UK tax net will be to remove these structures from the definition of excluded property – and therefore no longer excluded from IHT.
• This will apply whether the overseas structure is owned by an individual or a trust. Shares in offshore close companies and similar entities will no longer be excluded property if, and to the extent that, the value of any interest in the entity is derived directly or indirectly from residential property in the UK. There will be no change to the treatment of companies other than close companies and similar entities.
• The change will be effective for all chargeable events which take place after 5 April 2017, such as on death or the 10 year anniversary of a trust
• There are questions in the consultation over how to define a residential property for these purposes. HMRC seem to favour the same definition as that of a ‘dwelling’ for Non-Resident Capital Gains Tax purposes; with the exception that no relief will be given for main homes.
• HMRC raise concerns of being able to keep track over the charge to IHT on certain overseas structures and whether a block on property sales can be imposed until all IHT debts are paid.

Deemed domicile for long term residents

• Individuals who have been resident in the UK for 15 out of the previous 20 tax years (the 15/20 test) will become deemed domicile in the UK for income tax, capital gains and IHT from 6 April 2017.
• HMRC confirm that years spent as a child will count towards the 15/20 test. Split years of UK residence will also be included which means that proper planning for arrival and departure should be in place.

Rebasing of foreign assets

• Individuals who become deemed domicile from April 2017 can elect to rebase their directly held foreign assets to market value at this date; thereby only paying capital gains tax on any increase in value. This will be restricted to those individuals who have previously paid the remittance basis charge in any year prior to April 2017. The rebasing will not be available to a non-dom who becomes deemed domiciled after April 2017 or to those with a UK domicile of origin (i.e. born in the UK).

Temporary window for separating mixed funds

• The taxation of mixed funds is a complex area and HMRC are aware that it can prevent non-doms from remitting money to the UK.
• For a period of one year commencing 6 April 2017, HMRC are introducing a temporary window to allow individuals to re-organise and separate their mixed funds into clean capital, foreign income and foreign gains. This will be available to all non-doms, apart from those with a UK domicile of origin.

Non resident trusts

• There was some discussion in HMRC’s initial consultation to introduce a ‘benefits charge’ (taxing individuals on the benefits they receive from a trust rather than the income), however this has been scrapped.
• Instead all deemed domiciles will be taxed on chargeable gains arising from a trust if they retain an interest in the trust. This is not extended to deemed domicile settlors where the trust was set up before becoming deemed domicile (unless they derive a benefit from the trust).

Foreign Capital Losses

The treatment of foreign capital losses will need to be changed. In particular a foreign loss election will last only until the individual becomes UK domiciled or deemed-domiciled.

Other changes

• The annual £2,000 unremitted foreign income de-minimis will remain for non-doms, even after they become deemed domicile.
• The initial consultation suggested that an individual’s deemed domicile status for IHT purposes would only be lost after 6 years of non-UK residence. This has now been agreed by HMRC to be 4 years and it also applies to the spousal election(which can be made where one party to a marriage or civil partnership is non-domiciled).

It seems that HMRC have listened to some of the responses given to the initial consultation. There are certainly some valuable transitional rules, such as the rebasing of foreign assets and separation of mixed fund accounts which will need to be considered. This is a complex area of taxation and any change to existing arrangements may require consideration of three different taxes. As always, anyone that is potentially affected by these changes must take advice in good time.